How global energy markets are creating an ‘Amazon of oil’ to keep prices from rising

Call it the “Amazon of oil,” said Jim Wicklund, a veteran oil analyst and managing director at energy investment firm PPHB, comparing the power of the energy industry to the ecommerce giant’s famed innovation and logistics capabilities.

Even though President Trump announced an Iran ceasefire “on Wednesday” amid a new round of military strikes, US benchmark crude prices are still up nearly 5% to $74 per barrel—below the mid-May high of $112.

Although energy traders may see the latest attacks and harsh words as a dip in the rollercoaster of negotiations, they are also encouraged by the dynamics of the world’s energy performance, even in the midst of the biggest global shock of the modern era when the effective closure of the Strait of Hormuz temporarily cut off almost 20% of natural oil and liquefied natural gas.

“When you went back to the 1970s when we had oil, you had no way of knowing where the oil was and what it was doing,” Wicklund said. Good luck. “Today, I can finally find every ship full of oil in the sea, its owner, what’s in it, and who I can call to have it transferred to me.” Thus, oil prices have not been as significant in the last few years as they used to be.

“The correlation between inventories and the price of oil has decreased from a high correlation to almost no correlation today. I don’t need physical things like I used to. I can order quickly on Amazon for oil and buy loads on the water,” he said.

Another saving grace for transportation was the Trump administration’s decision to temporarily repeal the 106-year-old Jones Act, which requires cargo ships traveling between US ports to be built, flagged and manned, reducing the number of ships available to transport crude oil and refined products between domestic ports.

The waiver allowed more ships, for example, to transport fuel from the US Gulf Coast through the Panama Canal up to California, which has faced refinery shutdowns in recent months, to help ease the shortage.

A Chinese feature

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While commercial oil imports may not mean as much as they once did, the national strategic reserves of the US and especially China have proven to be important. Another major reason why oil prices have soared to such an alarming rate is because China built up its stockpiles and dramatically reduced its imports after the start of the war.

Before the war, China was importing more than 11.5 million barrels per day. In June, China’s supply fell below 7 million barrels per day, effectively reducing global oil demand by about 5 million barrels per day. Although China has not disclosed many details, the US government estimates that China’s oil reserves had risen to about 1.4 billion barrels before the war began—the product of a years-long emphasis on building up the reserves.

“China as a source of energy balance is really new,” said Arjun Murti, energy macro and policy partner at research and investment firm Veriten. “We did not anticipate or predict that China would reduce oil imports by such a large amount, which had such a big impact.”

Similarly, the US Strategic Petroleum Reserve is now at its lowest level since 1983, but still holds more than 300 million crude barrels—319 million barrels as of July 3—down from 415 million barrels at the start of the war.

And because Trump wants to keep fuel prices low, it’s unlikely the US will start filling its reserves before the midterm elections, analysts say. Trump has authorized a total drawdown of 172 million barrels over the next few months, so supplies could still drop significantly before they are rebuilt perhaps starting next year.

The strength of energy markets silenced the “doomsayers” who predicted record highs of $200 per barrel of oil, Wicklund said.

Although he did not predict such a high rate hike, Wicklund was “surprised” that oil prices fell as they fell in late June and July.

“I’m starting to believe,” he said. “Instead of trying to figure out why the market is wrong, figure out why you are wrong.”